Trading Partner Growth Forecasts Plummet

As expected, the October edition
of Consensus Forecasts has revealed a huge downward revision
to forecasts of GDP growth for New Zealand's largest trading
partners.

The 14-country index that is followed by the
RBNZ now points to average trade-weighted trading partner
growth of just 1.3% yoy in 2001 (previously 1.8% yoy ) and
2.1% yoy in 2002 (previously 3% yoy).

The total
cumulative downward revision over both years since the July
edition - that used by the RBNZ when compiling the forecasts
in its August Monetary Policy Statement (MPS) - is now a
staggering 1.9pps.

In its August MPS, the RBNZ produced
an alternative lower growth scenario which according to the
Bank's forecasts was consistent with an official cash rate
(OCR) around 75bps lower than the baseline scenario (the
baseline scenario projected the OCR to remain around
5.75-6%).

As the chart below shows, we estimate - perhaps
conservatively - that the October consensus forecasts imply
a scenario that is several multiples worse than the Bank's
alternative scenario.

All other things equal, and
assuming that lower world growth feeds through into lower
commodity prices etc in a broadly proportionate way, this
would suggest that the OCR should be 200bps or more lower
than the RBNZ's August baseline scenario - ie sub 4%.

Of
course, not all else is equal. For example, the economy grew
by much more than the Bank expected in Q2 and the NZD is
tracking a little below the RBNZ's forecasts. Moreover, most
economists expect a strong rebound in global growth later
next year as exceptionally easy monetary policy (and in the
case of the US, fiscal policy) underpins a synchronised
global recovery.

Nonetheless, if the RBNZ is to be
consistent, it is difficult to see how it could not now
conclude that the OCR needs to be set somewhat lower than
the present 5.25% (the Bank has already eased 50bps since
August).

We think a 25bp cut is close to a done deal.
Moreover, we think that a 50bps cut is also a fair prospect
(35% probability), especially given that the next meeting is
not scheduled until 24 January.

Indeed, while not our
central call, should the flow of data remain very negative,
we think it is not inconceivable that the OCR could be
lowered to 4.5% following the 24 Jan meeting. In this
scenario, Q1 2002 GDP is likely to be flat, if not negative.
We think this is a distinct possibility given the
precipitous declines in both business and consumer
confidence (the latter confirmed by last night's Colmar
Brunton survey, which showed a further fall in consumer
confidence from -1 to -10 - in line with last week's TV3
survey).

Darren Gibbs, Senior Economist, New
Zealand

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